A Life-or-Death Moment for Financial Advisors

If you answered “yes” to all three of these questions, your future is less certain than you think. Why? A constellation of forces is creating a significant threat to your business success. This threat cannot be prudently ignored. The factors comprising the looming threat include:

• The shift in control of most wealth assets to women;
• The sub-optimal planning approach many advisors employ for income generation;
• An unprecedented 11-year “bull” market;
• Historically low interest rates; and
• A male dominated (86%) advisor population.

Women will control almost all money. Will you manage your share?

Is there a business opportunity that garners more attention than the financial planning needs of women investors? The scale of the opportunity is breathtaking. According to McKinsey & Company, by the end of this decade, women will control $30 trillion in wealth assets. While this represents an epic path to growth, women already represent a staggering growth opportunity given their current control of more than $10 trillion.

In the U.S., women hold the majority of professional and managerial positions. They earn the majority of college degrees. They own 12 million businesses. Women represent a colossal business opportunity. While female clients represent a huge financial phenomenon and a key strategic propriety for advisors, the crucial opportunity within the opportunity centers on Boomer women and their need for solid income-planning advice. It’s among those investors that the majority of investments assets are to be found.

However, in terms of its practical meaning for financial advisors, this story of untapped business potential has a darker side. Too often advisors are serving up products, services and messaging that fails to resonate with women. According to the Boston Consulting Group,

Despite the increasing power of their purse strings, women remain largely underserved by the wealth management community. Too many banks and firms rely on broad assumptions about what women are looking for, resulting in products, services, and messaging that can feel superficial at best and condescending at worst.

In its report, Reinventing Wealth Management for Women, Accenture Consulting stated:

While generalizing an entire gender’s needs is tricky territory, it is safe to say that a majority of women show preferences that differ from those we have traditionally seen in male investors.

Accenture pointed out that women tend to be more conservative and longer-term investors than men, and that they typically wish to preserve as much wealth as possible:

Their primary wealth goals revolve around keeping money safe and saving for long-term goals, primarily retirement.

McKinsey & Company research shows that in the U.S. men make the investment decisions in two-thirds of the affluent households. But this will change. As men die, control of money will shift to their typically younger female spouses. Many of these women are nearing retirement or recently retired. However powerful, these dynamics should provide cold comfort for advisors who assume that female clients will necessarily drive their future business growth.

To a considerable extent, the financial services industry has failed to meet the needs and expectations of women. Oliver Wyman has stated that these failures are costing the male-dominated financial services industry $700 billion a year. Ouch! McKinsey determined that by simply retaining Boomer female clients, firms could see one-third more revenue potential. But that will be challenging given current industry practices.

Through their own research reports, eBooks and webcasts, an increasing number of asset managers and insurers are talking with advisors about the importance of addressing the needs of female investors. Major headlines have highlighted those efforts:

• Women will control investment assets equal to $30 trillion by the end of this decade.
• Women already control 83% of spending.
• The investment industry is not meeting the expectations and needs of female investors.
• The failure to meet women’s needs represents a lost revenue opportunity.
• In seven out of 10 instances, widows fire their male advisor.

While all of this is undeniably significant, the last point should cause considerable concern for the planning profession considering that the U.S. advisor population is overwhelmingly male. Unless course corrections are made, the majority of financial advisors will lose out on the largest business growth opportunity of their lifetimes.

Boomer women will increasingly need income-planning advice

I work primarily in income planning. I see the potential for an absolute catastrophe because a sizeable portion of the advisor population fails to address its clients’ income-planning needs. Unless change is brought about, the potential for millions of advisor-client relationships to blow-up is very real. When counseling clients on how to create retirement income, too many advisors rely upon the traditional systematic withdrawal plan (SWP).

I do not advocate for SWPs for most clients. A SWP is appropriate for some clients. If you are working with an “overfunded” client, someone who has a surplus of investment assets relative to their income need, the SWP is a fine option. But when you are dealing with “constrained” clients, those who must rely upon their savings to produce enough income to meet essential and discretionary expenses, a SWP should rarely be the choice.

That is a strong statement, but it’s justified. A SWP fails to protect against risks that can derail the client’s retirement security. As I’ve stated many times over recent years, a fiduciary advisor cannot meet their responsibilities to a “constrained investor” when recommending a SWP. Is there any advisor duty more important than protecting his or her client’s retirement security?

With “constrained” clients, there are two risks that concern me most: sequence and longevity risk. Either can ruin the client’s investment portfolio.

Advisors who specialize in income planning have moved past the SWP in favor of other income-generation strategies including hybrid approaches that use time-segmentation and the inclusion of lifetime payout annuities. These strategies incorporate product allocation to introduce dynamics that protect against risks that can wreck financial security in retirement. When clients are shown the superiority of these approaches in terms of protection against risks, they will opt for them over SWPs.

The problem with the SWP is elegantly described by financial advisor John Shrewsbury. Shrewsbury runs GenWealth Financial Advisors in Little Rock, AR, a rapidly growing advisory firm that specializes in income-distribution planning. Here’s what Shrewsbury said about SWP:

There are other income strategies which are antidotes for a flawed philosophy of ‘the 4% Rule.’ That antiquated rule is promoted by academics, and it works on a spreadsheet, but it doesn’t work at the kitchen table when a retiree is trying to pay bills. Reducing income during a market downturn is unthinkable for a client, but that’s what is required for the rule to be effective.

Shrewsbury is exactly right, and his comment about a market downturn is key.

Past as prologue?

One of the virtues of being older is that your expectations about future events are not as colored by the recent past. As in the 1920s, when people believed stocks were a “sure thing” bet, it’s easy for today’s advisors to feel confident that equity prices will continue to climb. After all, they seem to only go up. It has been 11 years, and it may appear to some that the fundamentals which used to govern the movement of asset prices have been passed by.

That’s because they have been passed by.

As I mentioned above, macro economist Richard Duncan has shown that in the U.S., since Bretton Woods, we’ve moved past capitalism in favor of creditism. Under the creditism system, it’s credit growth and fiat money that drives economic growth. Duncan claims that this fact is the most important thing to understand about macroeconomics in the 21st century. In the U.S., when real growth of credit falls below 2% on an annual basis, the country goes into recession. Between 1952 and 2009, the U.S. suffered nine recessions and each one was preceded by a decline in credit growth. As of Q3 2020, total credit in the U.S. stood at $82 trillion. That is 82 times the total credit of $1 trillion in 1964.

Government debt has expanded the fastest, especially since 2008. In 2020 alone, government debt rose by $5.2 trillion. The Fed’s balance sheet has expanded to remarkable levels and its stimulus policies continue to be extraordinarily supportive of asset prices. It’s no wonder that advisors and investors may feel that the Fed will do whatever it takes to keep the party going. But perhaps the Fed is paying too little attention to other potential consequences. Says Mohamed El-Erian, “Officially, the Fed appears to continue to think too little about two-sided distributions of potential outcomes and the related need to consider insurance for both tails of this distribution.”

Advisors employing SWPs to generate their client’s monthly income are gambling that the Fed can keep asset prices moving ever higher. To date, it’s been a successful bet. But the bigger question is whether retirees’ financial security be left to chance in the first place.

Again, if your clients are “constrained,” they have little capacity to assume this risk.

Women live longer; Their income strategy must also

One of the weakest points of a SWP is the lack of longevity protection. Blind faith that asset prices will keep climbing may seduce some advisors into thinking true longevity protection is unnecessary. Throughout my career I’ve heard advisors state their reluctance to use annuities, the only true longevity insurance. Their objections center on issues such as an annuity’s perceived high cost, the lack of upside growth potential, or the committing of “annuicide,” the advisor’s loss of AUM fees on assets shifted to an insurance company. The last objection is absurd, the first is outdated, and the middle one is irrelevant.

Inclusion of an annuity in an income-generation investing strategy mitigates the risks that can devastate the client’s financial security, e.g., portfolio losses early in retirement, living longer than expected, making unfortunate, emotionally driven investment decisions, etc. Therefore, on a client-by-client basis, determine if risk mitigation (insurance) is truly required. The answer will always go back to the client profile. If it’s an overfunded client, an annuity is generally unnecessary. On the other hand, if the client is “constrained,” I don’t know how the advisor bypasses recommending an annuity. It’s an issue of morals as much as economics. If the client can’t tolerate the risk of not being able to meet his or her essential expenses, then there is no moral justification for you to deny your retiree client an annuity. If your client is a healthy female who is concerned about preserving her wealth, and who needs to rely upon savings to produce income, it is virtually malpractice to forego recommending an annuity in her income strategy.

The timing of retirement means a lot (even the month)

Most advisors are aware of the potential negative consequences of sequence-of-returns risk. The year one chooses to retire can cost a lot in terms of lost income-generation potential. My firm, Wealth2k, Inc. worked with LIMRA’s Secure Retirement Institute to develop a multimedia presentation to dramatize the impact of sequence risk down to the month of retirement. This work revealed that as little as a three-month difference in the date of retirement can exact a seven-figure cost to the retiree. To make this reality understandable to everyone, we created a client-facing, educational multimedia presentation, “The Story of Ten Retirees.” It is a two-minute movie that illustrates what can happen to a client’s ability to generate income over a retirement lasting 30 years (you can receive a free copy of this movie by emailing [email protected]).

The story of 10 retirees is based upon 10 individuals who are demographically and financially identical. Each has an identical investment portfolio¹ and each enters retirement with the same balance of $500,000.

Upon entering retirement, each uses the 4% SWP strategy to generate monthly income. There’s only one thing that is different about the 10 retirees and that is the timing of their retirements.

Using actual market values from 1968-1970, we assumed that the individuals entered retirement in succession separated by a calendar quarter: Jan 1, April 1, July 1 etc. The analysis revealed dramatic differences in income generation ranging from the unluckiest retiree who suffered portfolio ruin prior to 30 years retired, to the luckiest who was able to produce 30 years of monthly income plus an ending balance of $2.6 million. The difference in results between retiree one and retiree two was dramatic, with nearly $1 million in lost income for retiree two, even though the difference in the timing of their retirements was only three months- January 1 versus April 1.

Modify and protect

If you have clients who are “constrained” and unprotected against the risks I’ve described, at the very least consider modifying their income strategy in a way that introduces protections against sequence and longevity risks. If the client is close to retirement or recently retired, it is vital to provide monthly income in the beginning phase of retirement that is generated from investments that are not subject to market risk. This creates almost perfect immunization against sequence risk while also providing a significant psychological benefit when equity markets inevitably retreat. When clients know that their monthly income is secure, it’s easier for them to resist the temptation to sell out of risk assets at exactly the wrong time.

Adding a measure of lifetime income from an annuity to protect the client’s ability to meet essential expenses is a necessary modification to almost any “constrained” investor’s income strategy. Allocating a share of portfolio assets to the purchase of a deferred-income annuity (DIA) is not just appropriate for “constrained” clients, especially healthy female clients, it helps ensure long-term, satisfying relationships with your clients. Failure to make these modifications for your “constrained” clients increases the odds that you will eventually lose these clients to other advisors who point out the weaknesses in their current income strategies.

Is getting fired in your future?

Here are three facts that should make you think carefully about your strategic approach to serving women investors:

• 80% of men die married.
• 80% of women die single.
• 70% of advisors are fired by the widow.

While males dominate in numbers of financial advisors compared to female advisors, they unfortunately also dominate in another area: making flawed assumptions. For example, too often male advisors silently but steadily alienate a female spouse by assuming facts that may be inaccurate. What are some of the flawed assumptions that male advisors can make? They assume:

• A man is the decision-maker;
• A woman wants direction;
• A couple’s finances are merged and jointly invested;
• All women are more risk-averse;

• Women are less knowledgeable than men about investing
• Her silence means agreement;
• It is acceptable, albeit unintentional, to talk down to her or make her feel undervalued;
• They naturally understand and are respecting her life journey and its implications;
• Women who are mothers think the same way as women without children; and
• Grandmothers want to support their grandchildren in a specific way.

We stand at the threshold of an unprecedented growth opportunity. Getting it right with income planning in general and for Boomer women in particular is your best path to a bright and prosperous future.

David Macchia is an author, retirement income industry entrepreneur and founder of Wealth2k, Inc. He is the developer of the widely used The Income for Life Model® as well as the recently introduced Women And Income™, the first retirement income solution developed for women investors.

¹The portfolio has an asset allocation of 42.5 percent large company stocks, 17.5 percent small company stocks, and 40 percent intermediate-term government bonds and is rebalanced annually. The initial withdrawal amount was $1,686 per month, or for the first year $20,235 or 4.00% of beginning assets. The individual retiree withdrew the same dollar amount within each calendar year and adjusted annually for the prior calendar year’s inflation rate. The cost of funds in the portfolio is 100 bps annually. Fund returns are from Ibbotson, Morningstar.

Read more articles by David Macchia